Return on Political Investment in the American Jobs Creation Act of 2004

by
Hui Chen, Katherine Gunny and Karthik Ramanna

There is a widespread assumption that corporate political spending is highly profitable, earning well more than what would be expected in a competitive market. However, in the popular press and even in previous scholarship most of the returns cited as evidence for this phenomenon are based on descriptive research rather than empirical studies. What are the real economic returns of corporate political spending? Here the authors apply a more rigorous approach for a clearly delimited time period by examining the returns to corporate political spending on what became the American Jobs Creation Act ("the AJCA") of 2004. Findings differ sharply from those generated in prior studies. Specifically, for the median politically active firm in the sample 1) an increase in $1 million in lobbying expenditures is associated with about $32.35 million in taxes saved; 2) an increase in $100,000 of PAC contributions is associated with about $15.64 million in taxes saved; and 3) the additional filing of ten tax-related lobbying reports is associated with about $21.08 million in taxes saved. These results are particularly relevant in light of continued corporate attempts to generate support in the Congress for another "one-time" tax break on repatriated foreign income in line with the AJCA of 2004. Overall, the study suggests that the very high returns to political investment heralded in the press - obtained through descriptive methods - are, in fact, nearly an order of magnitude smaller when more rigorously estimated via instrumentation. Key concepts include:

Prior research has shown that firms generally use three different methods of political spending in complement with one another. It is thus more meaningful to consider three return estimates jointly.

In this current paper, for the median firm in the sample an increase of $1 million in lobbying contributions (over the firm's prior cycle contributions) is associated with $32.35 million in taxes saved on repatriated foreign income.

An increase of $100,000 in PAC (political action committee) contributions is associated with about $15.64 million in taxes saved.

The additional filing of ten tax-related lobbying reports is associated with about $21.08 million in taxes saved.

Author Abstract

Prior literature raises a "puzzle" of high rates of return on corporate political investment, but evidence for this puzzle is largely descriptive in nature. We exploit the setting of the American Jobs Creation Act's passage in 2004 to provide more robust estimates of political returns based on instrumentation in a two-stage regression model. We find for the median sample firm that an increase of $1 million in lobbying spending is associated with about $32.35 million in taxes saved. These estimates, while consistent with a high-returns "puzzle," are nearly an order of magnitude lower than those previously reported via descriptive methods.